Banking on mergers

EDITORIAL

The market forces have to be reckoned with as far as the financial institutions (FIs) are concerned. It is true that in recent years there have been many anomalies in the functioning of the FIs, largely because of the unhealthy competition among them to get their share of the pie. Even the Nepal Rastra Bank, the central bank, had announced its merger guidelines over a year ago to encourage mergers of the financial institutions, because it saw their unsustainable numbers a problem for their survival itself. With so many players in the market, what had been witnessed till recently was that each of them wanted to outdo the other to make profit. In this context, it would be worthwhile to point out the liquidity crunch caused by the excessive investment by the banks in the real estate sector. The consequence was that high interest rates were offered for the depositors while the lending rates too peaked. The deposits swelled, but the FIs could not find borrowers at the high rates that they were charging. Moreover, with the small capital base that most of the FIs have, they were not able to invest in big projects like hydropower or other infrastructure construction. The banks are thus sitting on piles of money but without finding investment outlets.

The trend is evident now that the financial institutions are going for mergers in a bid to increase their capital base substantially so that their survival in the market can be possible. It will also bring to an end to some extent the cutthroat competition among them to corner their share of the market. The case of NIC and Bank of Asia opting for consolidation together with Machchhapuchhre Bank and Standard Finance Limited, and Global Bank, IME Financial Institution and Lord Buddha Finance is an indication that the FIs have realised that their very survival depends on increasing their size, that is the capital base. In fact, to date there are some 42 active institutions in the financial sector that have applied for merger approval from the NRB. This is happening all because of the market forces, and that will result in the long term financial stability.

It is beyond doubt that Nepal’s market size as such is very small, and it has not increased very much in the last five/six years. Therefore, the numerous FIs have to compete in the small market resulting in financial distortions, including investments in high-risk areas, which has proved fatal for many of the players. The best measure for financial stability now is to increase the balance sheet size which means going in a big way for mergers which again guarantee healthy competition and financial stability.

This is also the way that the merger will result in more capital base to go for bigger investments which is the need of the hour for the country to better its lacklustre economic performance. The pooling in of financial resources through mergers of financial institutions can overcome the paucity of funds in the market, and the tendency to look for assistance from the government in spurring development activities would be reduced. The merger move is one more way to reduce the number of FIs and also curtail unhealthy competition among them to retain their market share.

Prohibit them

Alcoholism and gambling are aberrations that need to be taken up seriously. Because of these thousands of families are ruined. Partaking of alcohol can be hazardous to health as well. Despite knowing this, there are many who consume excessively going to the extent of becoming addicts. In the case of gambling, this folly leads to financial crisis, and habitual gamblers often fall in debt and lose all their assets, including houses and land. The drive by the police to nab inebriated vehicle drivers paid off. Now, fewer vehicle drivers commit the serious offence of driving under the influence of alcohol. This campaign should be a sustained one for its success in reducing the number of accidents involving vehicles.

Similarly, the police raided casinos and arrested Nepalese gambling there recently. The law prohibits Nepali nationals from gambling in the casino. But, this provision is apparently ignored by many. Considering the serious harm that gambling and alcoholism does to not only the gamblers but their families and ultimately the society as well, the prohibition laws should be strictly enforced.